Comptroller of the Currency John Dugan said regulators worldwide should prohibit lenders from making payment-option adjustable-rate mortgages and other negative amortizing products.
"We should generally prohibit the lowering of monthly payments through so-called negative amortization mortgages, which have performed terribly," Dugan told an international banking conference in Tokyo.
The U.S. national bank supervisor urged regulators to adopt minimum mortgage standards that require verification of borrowers' income and assets, meaningful downpayments and underwriting that takes into account the fully indexed interest rate.
The comptroller noted that real estate markets around the world are heating up due to low interest rates and they should be careful.
"We in America fundamentally lost our way" and the consequences have been "disastrous," Dugan said. "It's simply hard to believe how far and how fast mortgage originators strayed from basic, fundamental, common-sense principles of sound underwriting. And perhaps it's even more astounding that lenders, investors and yes, regulators, allowed this to happen," he added.
In the U.S., few, if any, are still originating these types of mortgages.